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American Home Assurance Company v. Encap Golf Holdings, LLC

BER-F-35353-07 and BER-C-61-09 (N.J. Super. Ch. Div. 2011) (Unpublished)

CONTRACTORS; BONDS; CONSTRUCTION LIEN — Unlike a payment bond, a performance bond’s benefits run only from the bonding company to the property owner or other named beneficiary and a bonding company has no obligation to pay monies owed to subcontractors; further, construction liens are extinguished if title to the liened property reverts to a prior owner under the terms of a deed.

A state commission acquired title to various dormant landfill areas. It deeded title to a developer that had contracted to remediate the properties and then construct a golf course, single and multi-family residences, and a hotel. The developer, in turn, contracted with various entities to do work necessary to render the landfill sites environmentally acceptable for development. It defaulted under the terms of its contract with the commission and the commission made a demand that its bonding company perform the developer’s contract obligations. Based on the uncured defaults, the commission issued a termination notice to the developer alleging it was to receive reversionary title to the property. The developer’s primary remediation contractor sued to collect on the performance bond issued to the commission for work done on the site for which the contractor had not been paid. That contractor also filed construction liens, and asserted that it was entitled to be paid under the bonding company’s “Pre-Completion Security” document, the Construction Lien Law, the Public Works Act, and under claims of unjust enrichment.

The Chancery Division granted summary judgment in favor of the commission and bonding company. The Court held that the deeds of conveyance contained a reversion clause under which the title was to revert to the commission if the developer defaulted on its project obligations. As such, the contractor’s rights against the property ceased upon this reversion, and it had no rights against the commission or the bonding company for payment. The Court held the “pre-completion security” document was a performance bond, not a payment bond, and benefits ran from the bonding company solely to the commission under that document. The security document imposed no payment obligations upon the bonding company to meet those obligations to the defaulting corporation.

The Court further held that the security document was not a public works bond nor was the project a public one for which a payment bond to protect contractors was a legal requirement under the New Jersey Public Works Act. That Act applies to public works done at the expense of the State, and in this instance the environmental work was to be paid for solely by the developer. Also, the end result of this project was not a public one – the creation of a private golf course and hotel.

The Court also held the Construction Lien Law provided no basis for the continuance of the contractor’s lien as it attached only to the developer’s interest in the land which had been extinguished. It also found that the contractor had no cause of action against the commission or the bonding company based upon an equitable claim of unjust enrichment, as no relationship existed between the parties that might cause an expectation of payment. The contractor expected payment from the developer, and not from the commission. The bond issued by the bonding company expressly provided that no rights inured under the bond to any entity other than the commission.

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